Do you want your wealth to contribute to the prosperity of others? Thanks to ESG investing, your success can now have a ripple effect well beyond your own bank balance. We find out how…
What is ESG investing?
ESG stands for Ethical, Sustainable and Corporate Governance.
The concept is based on the belief that businesses with solid policies around each of these principles will ultimately perform better than those without. Typically, ESG investing shuns ‘sin stocks’, so companies involved in the manufacturing tobacco, weapons, animal testing, environmental destruction, for example.
It is important to understand the distinction between ESG investing and ethical investing. Whilst the former is governed by a clear, broadly-agreed framework, the latter is subjective and comes down to individual belief systems. Or, to rely on a cliche, one person’s trash is another’s treasure!
Either way, here at ActOn Wealth, we fully support ESG and ethical investing. Knowing our clients are passionate to help people and causes is a huge motivation.
Like you, we believe there is a way to do good for your wealth and world.
How do we define ESG investing?
Ethics can, of course, be a deep dive into ideals, beliefs and moral principles. Whilst we’re not philosophers, most of us can agree on and share some fundamental investment values that avoid:
Causing illness, disease or death
Destroying or damaging the environment
Disrespecting or harming people
How do we apply ESG investing to your portfolio?
The good news is that growing your savings and building a better world is not at all difficult. We use an ethical screening process that requires you to answer a series of questions guiding us to companies that align with your ESG ideals.
What are ethical stocks?
Our screening ultimately leads to companies connected to renewable energy, recycling, healthcare and wellbeing, efficient transport, sustainable products, community finance, health food production and social wellbeing.
Inversely, our screening avoids companies that are linked to tobacco, live animal exports, old-growth logging, gambling, fossil fuels, social harm and environmental damage.
Why is ethical investing good?
The world is so much more self-aware than it used to be. Many of us now understand we need to act as custodians of the planet and its people.
To that end, it’s terrific to see online marketplaces like Everything Sustainable become increasingly popular. But spreading this goodness now goes beyond conscious consumption. Indeed, we have the power to extend our positive influence not just as buyers, but as investors.
Ethical investing really does help your wealth and the wellbeing of the world around you.
So, if you are someone who believes deeply in the positive effects that can ripple from just one individual act of good, then ESG is a comfortable investment channel for you.
Why has ethical investing become so popular?
If you think the global pandemic has contributed to more conscious investing, you would be correct. However, this trend started well before COVID-19. In fact, it experienced a real spike over a decade ago, when the world witnessed how profit without principle could have disastrous consequences. The case in point, of course, was the biggest marine oil spill in history along the Gulf of Mexico. The environmental catastrophe also became a financial disaster, with investors quickly realising that a lack of robust governance could have disastrous effects for all. In short, harming the environment can harm the investment portfolio.
How ‘green-shorting’ puts pressure on ‘dirty’ businesses
Green shorting is an increasingly prevalent and aggressive stock market strategy whereby investors apply pressure on ‘dirty’ businesses or operators they believe are either greenwashing or overtly not pulling their ESG weight. It is a form of short selling, whereby investors aim to earn a profit by betting on the drop of a company's value. This understandably compromises the company’s value, making it very uncomfortable for executives to maintain the status quo. Indeed, money talks…
Is ethical investing profitable?
Don’t make the mistake of thinking ethical investing is a soft touch that won’t deliver a return. Granted, in its formative years, ‘clean’ investing did come at a cost, in that investors often sacrificed return for the personal reward of doing what they felt was the right thing. Not anymore. Following that colossal oil spill we mentioned earlier, more and more investors began to turn to greener portfolio options. With bigger numbers moving towards ESG options, fund managers were able to reduce their fees to be more in line with those of traditional investments.
International ESG share funds
If we consider this report from Responsible Investment Association Australia (page ten), we can see how ESG funds investing in the international shares asset class compares to the comparable Morningstar index. Years one, three and five all show the ESG fund as showing significantly stronger returns. Although the average annual return across a full ten year period still favours the more traditional stock, the gap is closing.
| Y1 | Y3 | Y5 | Y10 |
Responsible investment fund average | 8.3% | 11.0% | 11.4% | 10.1% |
Morningstar category: Enquiry World Large Blend | 5.7% | 9.5% | 9.8% | 11.7% |
Australian ESG share funds
Interestingly, the equivalent Australian ESG vs non-ESG funds does not yet look quite as positive, which is largely due to Australians still warming to the concept. Indeed, we have every reason to believe things here will follow suit with global trends and if anything, it bodes well to catch that train early!
Contact us about ethical investing
If making a profit with principle (in both senses of the definition) is important to you, contact our team today. We’re passionate about ESG investing and we’d be delighted to share our knowledge and advice with you.